EUR/USD Rate Talking Points
EUR/USD halts a five-day selloff as it bounces back from a fresh yearly low (1.0806), but the European Central Bank (ECB) interest rate decision may curb the recent rebound in the Euro as the Governing Council is widely expected to retain the current policy.
Euro Forecast: EUR/USD Rebound Emerges Ahead of ECB Rate Decision
EUR/USD snaps the series of lower highs and lows carried over from last week even the US and its allies ban oil imports from Russia, and the recent rebound in the exchange rate may trigger a textbook buy signal in the Relative Strength Index (RSI) as the oscillator attempts to be climb above 30.
As a result, EUR/USD may stage a larger rebound ahead of the ECB meeting as there appears to be a recovery in risk appetite, but the Russia-Ukraine war may continue to drag on the exchange rate as it puts pressure on the ECB to delay normalizing monetary policy.
It remains to be seen if the ECB will lay out an exit strategy as the central bank plans to βend net purchases under the pandemic emergency purchase programme (PEPP) at the end of March,β and President Christine Lagarde and Co. may endorse a wait-and-see for the foreseeable future as βgrowth is expected to remain subdued in the first quarter.β
In turn, the ECB rate decision may generate a bearish reaction in the Euro if the central bank tames speculation for an imminent in monetary policy, and a further decline in EUR/USD may fuel the tilt in retail sentiment like the behavior seen during the previous year.
The IG Client Sentiment report shows 66.94% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 2.02 to 1.
The number of traders net-long is 7.71% higher than yesterday and 13.45% higher from last week, while the number of traders net-short is 4.05% higher than yesterday and 4.28% lower from last week. The rise in net-long interest has fueled the crowding behavior as 63.08% of traders were net-long EUR/USD last week, while the decline in net-short position comes as the exchange rate halts a five-day selloff.
With that said, the ECB rate decision may do little to curb the recent weakness in EUR/USD as the Governing Council is widely expected to retain the current policy, but a move above 30 in the RSI is likely to be accompanied by a further recovery in the exchange rate as the bearish momentum abates.
EUR/USD Rate Daily Chart
Source: Trading View
- The broader outlook for EUR/USD remains tilted to the downside as the 200-Day SMA (1.1577) still reflects a negative slope, with the exchange rate clearing the June 2020 low (1.1101) as it failed to defend the opening range for 2022.
- The recent decline in EUR/USD pushed the Relative Strength Index (RSI) into oversold territory for the first time this year, but the failed attempt to test the May 2020 low (1.0767) seems to be pulling the oscillator back from the extreme reading, with a move above 30 in the indicator likely to be accompanied by a further recovery in the exchange rate as the bearish momentum abates.
- Lack of momentum to test the 1.0770 (100% expansion) to 1.0780 (100% expansion) region has pushed EUR/USD back to the Fibonacci overlap around 1.0860 (23.6% expansion) to 1.0930 (78.6% expansion), with the next area of interest coming in around 1.1000 (78.6% retracement) to 1.1050 (61.8% expansion).
- However, a break/close below the 1.0770 (100% expansion) to 1.0780 (100% expansion) region may push EUR/USD toward the April 2020 low (1.0727), with a move below the March 2020 low (1.0636) opening up the 1.0570 (100% expansion) region.
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
